Saturday, October 24, 2009

Jared Diamond, Chinese currency, and the Gleam in your daddy's eye

A couple days ago as I was rushing to the Tanner building I ran into Kirk Larsen, an Asian studies professor at BYU (and my great-uncle's son). I stopped to chat with him for a bit and told him about a book I'm reading, Collapse by Jared Diamond. Somewhat to my surprise, he had read it found it valuable. I say somewhat because about a week ago I was chatting about some of the concepts in the book with another professor, Steven Peck, who I learned had also read the book!

Collapse reviews some ancient and modern examples (such as Easter Island, the Norse Greenland, Vikings, China, Haiti, and Rwanda among others) of societies that either persisted sustainably for centuries or, alternatively, self-destructed. He identifies a five-point framework for evaluating these societies and their fates: 1) human-caused environmental damage 2) climate change 3) hostile neighbors 4) friendly trade partners 5) society's responses to its environmental problems. Generally, I found his analysis reasonable and persuasive. I would similarly evaluate my experience when reading another of his books, Guns, Germs, and Steel. Anyway, one of the more compelling ideas he expostulates is the tension between long and short-term interest in societal, corporate, and individual decision making. For instance, competing fishing companies in the short run have little incentive to curb their fish intake. Because catching more fish in a season will bring them certain, immediate profits and competitive advantage, it is in their short-term interest to overfish. Of course, if all the fishing companies overfish, they destroy the fish populations and impoverish their own and others' future interests since there won't be descendants of that fish population to catch a decade or century down the road.  Peccata contra naturam sunt gravissima - "wrongs against nature are the most serious." 

This idea which Jared Diamond explores illustrates a somewhat uncomfortable truth related to Chinese currency (the Renmindbi). The value of the US dollar constantly fluctuates, and a primary factor affecting the Renminbi:dollar exchange rate is the credit rating of the US government. Unless the US decides to start behaving in significantly more fiscally responsible ways, it's currency and credibility may soon be replaced, and its ability to command low-interest loans will fail: "If another currency or basket of currencies replaced the dollar as the reserve currency, the U.S. would face higher interest rates to attract capital, reducing economic growth for the long-term. The Economist wrote in May 2009: "Having spent a fortune bailing out their banks, Western governments will have to pay a price in terms of higher taxes to meet the interest on that debt. In the case of countries (like Britain and America) that have trade as well as budget deficits, those higher taxes will be needed to meet the claims of foreign creditors" (Economist-A New Global System is Coming Into Existence, May 2009). As of today the single largest creditor of the US government is China - and they're concerned (http://www.washingtonpost.com/wp-dyn/content/article/2009/03/13/AR2009031300703.html). Why are creditors worried? "Key drivers of these risks relate to the unwillingness of the U.S. to live within its means, both from a budget deficit and trade deficit standpoint. For example, the Government Accountability Office (GAO), the Federal Government's auditor, argues that the U.S. is on a fiscally "unsustainable" path and that politicians and the electorate have been unwilling to change this path.[38]The 2010 U.S. budget indicates annual debt increases of nearly $1 trillion annually through 2019, with an unprecedented $1.0 trillion debt increase in 2009. By 2019 the U.S. national debt will be $18.4 trillion, approximately 148% of GDP, up from its approximately 80% level in April 2009.[39]"

And the "drivers of these risks" don't show any sign of flagging. "This is because expenditures related to entitlement programs such as Social Security, Medicare, and Medicaid are growing considerably faster than the economy overall, as the population grows older. These agencies have indicated that under current law, sometime between 2030 and 2040, mandatory spending (primarily Social Security, Medicare, Medicaid, and interest on the national debt) will exceed tax revenue. In other words, all discretionary spending (e.g., defense, homeland security, law enforcement, education, etc.) will require borrowing and related deficit spending. These agencies have used such language as "unsustainable" and "trainwreck" to describe such a future...[42] If significant reforms are not undertaken, benefits under entitlement programs will exceed government income by over $40 trillion over the next 75 years.[47] According to the GAO, this will cause debt ratios relative to GDP to double by 2040 and double again by 2060, reaching 600 percent by 2080.[48]" (http://en.wikipedia.org/wiki/United_States_public_debt).

So why is there no check on this gross irresponsibility manifest by the voting public and its elected officials? I think that part of the reason goes back to the old complaint of the founding Fathers: taxation without representation. It also has to do with a quaint little phrase:
"in this economic crisis, first and foremost. He may have contributed to some of it by no means did he start this problem. This problem started back decades ago in reality. So long ago that many of the registered voters wouldn’t even remember because they weren’t even a gleam in their daddy’s eye yet. However, they are registered voters today and they are the nucleus of a voting disaster about to happen..." (http://homelandsecurityus.com/?p=302).

Let me be a little more clear. I propose that a primary reason why the electorate and federal government spend in such a patently irresponsible way is because those that will be paying the bill through their taxes are barred from voting. Illustration: In 1960, let's say, the country faces a recession (unimaginable, right?). The federal government borrows 80 billion dollars, which it spends on bailouts and economic stimulus initiatives. The loan has a 6% interest rate and is to be paid off in 30 years. By the time the loan is paid off, the US paid 173 billion dollars to settle the debt. That means that the country decided to pay 173 billion dollars between 1960 and 1990 in exchange for the privilege of spending 80 billion dollars in 1960. That privilege cost (in addition to paying the principal of 80 billion) 93 billion dollars! See how debt works? (In October 1998 President Hinckley of the LDS church said in priesthood session: "Since the beginnings of the Church, the Lord has spoken on this matter of debt. To Martin Harris through revelation, He said: "Pay the debt thou hast contracted with the printer. Release thyself from bondage" (D&C 19:35).

President Heber J. Grant spoke repeatedly on this matter from this pulpit. He said: "If there is any one thing that will bring peace and contentment into the human heart, and into the family, it is to live within our means. And if there is any one thing that is grinding and discouraging and disheartening, it is to have debts and obligations that one cannot meet" (Gospel Standards, comp. G. Homer Durham [1941], 111)."


So who paid the 173 billion dollars? Let's look at a group of people that paid that debt via their taxes between 1960 and 1990. This group of people were born between 1945 and 1955- part of the baby boomer generation. In 1960 the oldest of this group were 15 years old and the youngest 5. Not a single member of this group was old enough to represent their interests by voting in 1960. By 1990 the oldest members were 45 and the youngest 35 and all had spent a significant portion of their yearly working incomes of the preceding two decades or so paying off the loan they had no say in creating. They were barred from voting (unrepresented) because they were too young.

Now if I were better educated, I would use a real example with real numbers from America's recent history. Yet the illustration shows the problem- the loans we as the electorate choose today through our leaders burden future generations- those who are unborn- those who are, today, not yet even a gleam in their daddy's eye. The unborn who will pay our debts can't complain about their taxation without representation because they're not around yet to object! It is the same problem as faced by many societies Jared Diamond reviews in Collapse: the interests of subsequent generations are breached because of the short-term interests of a present generation. For instance, an Easter Island society, the Rapanui, finds certain and immediate benefits from logging, hunting, and farming activity resulting from wide-scale deforestation. 9 decades of deforestation later, not a single grove of trees can be found on the entire island, soil erosion has destroyed the agricultural potential of 90% of the island, and not a single species of megafauna (animals larger than 40 kg) remains. The young Rapanui living 90 years downstream from the initial deforesters. Both the Chinese currency and Jared Diamond problem disadvantage the "not even a gleam in your daddy's eye" generation.

So is there a solution? I think there are a couple viable ones. I invite your constructive ideas to add to the pool of candidate solutions.

#1: Josh Hansen, my roommate, said that simply internalizing externalities in the present will result in giving future generations a fair shake. Specifically, he suggests tying a mandatory tax increase to any spending (rather than making the payment ISEP [It's Somebody Else's Problem, the spenders would have to pay more taxes if they choose more services]. Make the people that consume a government-provided good or service pay for it? Sounds revolutionary.

#2 One idea I've entertained is to represent future generations by giving them a vote. Some thinktanks and institutions exist already that seek to penetrate the interests of future generations or what the world will look like in 30 years (e.g. the London office of Royal Dutch Shell oil Company, who tries to predict alternative scenarios for the state of the world in coming decades- see Collapse, pg. 447). Obviously it's impossible to predict with absolute confidence the interests or behavior of the unborn, but it is feasible to reach conclusions about their rational interests (such as having a say in their own government, having a means for obtaining a livelihood, security and liberty interests, etc.) Perhaps these thinktanks could be given, say, 15% of the vote to represent unborn generations in decisions that bear an overwhelming likelihood of directly affection them. This contingent would likely make voting decisions likely to result in more fiscally and environmentally responsible policy.

Scariest trailer I've ever seen: http://www.youtube.com/swf/l.swf?video_id=HBo2xQIWHiM&autoplay=1

A lecture by Jared Diamond about Collapse: http://www.youtube.com/watch?v=IESYMFtLIis



2 comments:

  1. The Parable of the Acorn

    I passed a couple of oak trees on a walkway today and was impressed by the quantity of acorns the trees had shed. It reminded me of the millions and millions of juniper berries shed by juniper trees in the juniper/pinyon pine forests of southern Utah where I worked wilderness therapy. Juniper and oak trees are paragons of the principle of "investing in the next generation." While the trees are productive, they spend almost all their energy producing, fertilizing, and preparing to distribute seeds. They store precious nutrients to bequeath to their children in every kernel. They toil all the summer months so that when the time is right to roll the reproductive dice, the next generation will be as well-equipped for survival as their parents can afford.

    How well do we as Americans follow this example? Rather than bequeathing a savings account and a protected, rich, diverse environment to future generations, we have chosen to burden them with an almost insurmountable debt load and unfunded obligations such as Social Security, Medicare, and Medicaid. Though environmentally sound measures are on the rise, ours and other countries have been slow to take the steps necessary to protect soils, biodiversity, and other natural resources such as air and water. These chosen realities represent rampant selfishness and a breach of the stewardship obligation we owe as a society.

    The national remedies that readily come to mind include raising taxes to pay off debt, saving, and reducing spending. Not one of those sounds attractive. However, most gifts of value come at a cost. An investment in the future is exactly that- an investment. Consider the benefits we are privileged to experience because of the sacrifice and investment of our forbears, such as the Founding Fathers (examples include the Constitution and our independence). What riches will our posterity inherit from us? So far, your share of the national debt that will be heaped on future generations is $184,000 and growing (see http://www.pgpf.org). How well are we as Americans investing in future generations?

    Just go ask the oak trees.

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  2. This entire topic makes my heart heavy. I feel helpless to do anything about it. However,
    I really liked the idea about preparing great gifts for our juniper seeds. Gave me a small epiphany about a different way to view my personal finances now in behalf of the future. I may act in that vein.

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